Private credit is emerging as the most active category for on-chain tokenized assets. However, recent bankruptcies and significant value write-offs within the private credit sector are now casting a shadow of concern over the broader crypto space and the practical applications of tokenized loans.
Private credit is experiencing rapid growth within traditional finance and has recently expanded its reach into the cryptocurrency domain. Morgan Stanley estimates that the private credit market is projected to grow to $2.6 trillion by 2029. Other projections place the industry's size at approximately $3 trillion by the end of 2025.
The private credit sector has come under increased scrutiny following calls for greater oversight from US Senator Elizabeth Warren. This demand for investigation followed the recent financial collapses of Tricolor Holdings and First Brands Group. The expansion of private credit has fueled concerns about the presence of toxic and non-transparent risk. While tokenized private credit is still in its early stages of adoption within the Decentralized Finance (DeFi) space, it has already highlighted how the uncertain valuation of loans can negatively impact crypto projects.
Private Credit May Inject More Risk into the Crypto Space
Private credit encompasses loans aggregated from multiple sources. According to RWA.xyz, the total value of tokenized private credit has reached $2.1 billion, a significant increase from just $49,000 at the close of 2024. This rapid influx of tokens backed by private credit is prompting questions about the capacity of crypto finance to absorb the associated risks.
The Figure HELOC token alone carries over $14 billion in private credit, although its trading is confined to its internal market. Other tokenized private loan tokens have found their way into the DeFi ecosystem.
The tokenization of loan baskets further obscures the underlying asset quality, posing potential threats to crypto protocols.
Morpho Turned into a Vector for Private Credit Risk
Morpho, a widely adopted lending protocol, has already developed a reputation for supporting risky vaults and enabling user-driven curation. The majority of vaults on Morpho utilize crypto assets as collateral.
However, some specialized vaults have begun to offer credit for packaged, tokenized private loans. Morpho integrated Fasanara's F-ONE products, a flagship offering from the fund. This package of private loans was tokenized by Midas and is traded under the ticker mF-ONE. Fasanara's product is primarily based on private credit extended to small and medium-sized enterprises.
Selected Midas users have the ability to borrow USDC against mF-ONE tokens, accessing approximately $2 billion in stablecoin liquidity.
The vault treated mF-ONE as standard collateral, which did not initially present any issues for Morpho. The lending market was also curated by Steakhouse Finance.
The situation became problematic when Fasanara was compelled to write off 2% of its fund's value to more accurately reflect the valuation of the packaged loans. This adjustment impacted the high-risk Smokehouse USDC vault, curated by Steakhouse Finance.
The vault is still considered relatively risk-free, currently holding over $23 million in available liquidity. The Smokehouse mF-ONE USDC vault recently marked its first anniversary and has maintained healthy collateral and liquidity levels. Etherscan data indicates that only 36 wallets hold mF-ONE tokens.
Steakhouse explained that a 2% drop in collateral price was not a significant concern, especially when contrasted with the considerably higher volatility experienced in the crypto market.
Despite the minimal impact, startups such as D2 Finance have cautioned that tokenized private loans may not be suitable for crypto DeFi platforms. D2 also issued a warning to Obex regarding the use of RWA collateral within the Sky Ecosystem.
Obex successfully raised $37 million with the objective of becoming an incubator and issuing RWA-backed stablecoins. Such a move could amplify the contagion risk originating from tokenized private loans. The issuance of stablecoins backed by private loans carries the potential for collateral value loss and subsequent de-pegging.